Private Equity Digs Deep

Private equity is mining the metals sector for deal nuggets.

Apollo Management's $1.15 billion plan to acquire Swiss Xstrata's aluminum business, unveiled earlier this month, underscores private equity's attraction to mining. And increasingly, the story goes well beyond silver and gold.

Instead, hard assets such as steel and aluminum -- and even rare metals such as uranium -- are luring private equity investors who expect demand for these commodities to spike as supplies dwindle, says one industry observer.

Private equity's interest comes as the publicly traded miners are undergoing a fierce round of consolidation. Big mining companies have been using their hefty cash hoards and resurgent shares to buy up rivals. Freeport McMoran (FCX) last month sealed its $26 billion buy of U.S. copper titan Phelps Dodge. Last week, Lundin Mining (LMC) agreed to buy Canada's Tenke.

But Chris Snow, metals and mining analyst at independent research firm CreditSights in New York, doesn't expect private equity to cross swords with bigger players.

"I don't see financial buyers going up against the bigger players and pitting their balance sheets up against strategic players," he says.

That said, there are several factors driving interest in mining.

Construction and development internationally has driven up steel prices. Industrial companies such as aluminum manufacturer Alcoa (AA) also have benefited, as shown by last week's report of a 9% rise in first-quarter net income on higher-than-expected revenue. And uranium is becoming a much more attractive metal, given the endorsement by many energy companies of the nuclear option.

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